Excess Contributions on Roth IRA

[Juir]

I've seen this question before, but it's still confusing.

Excess contributions were made to a Roth IRA in 2021.  The mistake was discovered in 2022 and the contribution was withdrawn along with the earnings in Feb of 2022.  We won't receive a 1099-R for this until 2023 for 2022.

Do we have to report the earnings for 2021 on our 2021 return now or in 2022 since we received the earnings in 2022?  (The earnings were made in 2021, but we didn't receive them back until 2022.)

Do we make up a 1099-R or wait for the one to come from the financial institution next January?  If we do make one up, what year do we put on it?  If we wait for the real one to come in 2023 (for 2022), will we have to amend the 2021 return?

[Juir]

You say that the earnings have to be reported and taxed in 2021.  Does that mean I have to make up a 1099-R  in order to report it on the 2021 tax return or just wait until the 1099-R comes in 2023?  If I wait until next year to report it, will I have to amend the 2021 return?

We are older than 59 1/2, so that is not an issue.

[Juir]

This seems easy enough, but why have other people with this same question gotten the advice to make a 1099-R?  With a 1099-R the info will appear in form 1040 on line 4a and 4b.  Is it ok for this info to just appear on line 8 (Other Income) of 1040 with an explanation of "Excess earnings for excess contributions of Roth IRA"?  (On line 8, I put just the earnings.  On line 4a would be the total distribution and line 4b would be the earnings on that distribution if one had a 1099-R.)  

Is there a difference, or can you do it either way?

[FangxiaL]

It should make a difference.

You will be taxed on the earnings for the excess contributions, plus the 10% penalty. If reported using 1099-R, the 10% additions to taxes will be calculated properly. If reported as other income, the 10% won't be calculated properly, if calculated at all.  

@Juir

[Juir]

We are taking the excess contributions and earnings on those contributions in 2021 out of the Roth IRA before the tax deadline of April 18, 2022.  This has already been done.  Here's what I found online:

Withdraw the excess contribution before filing your tax return. The IRS treats this as though the contribution never happened, and no 6% penalty will apply. You must also remove any earnings on the investments during that time period. The earnings must be included in your income, and you will have to pay income taxes on them. If you are under age 59 ½ you will also need to pay a 10% early withdrawal penalty, but only on the investment earnings attributed to the excess contribution. 

We are over age 60, so there should be no penalty for early withdrawal.  We just have to pay taxes on the earnings.  Next January we will receive a 1099-R with all of this info on it, but we need to report it now on our 2021 return.

So, the question remains -- Do we have to make up a 1099-R for this, or can we just put it in "Other Income"?

[DanaB27]

Yes, you will have to create a 1099-R for the withdrawal of excess contribution plus earnings if you want to avoid amending your 2021 return.

You will get a 1099-R 2022 in 2023 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options: 

• You can wait until you receive the 1099-R  2022 in 2023 and amend your 2021 return or
• You can report it now in your 2021 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything in 2022 tax return but the withholding will be applied to 2022.

To create a 1099-R in your 2021 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2021?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount under "Another reason" if you are over 59 1/2 (if you under 59 1/2 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

[Edited 3/5/2022 | 2:00pm PST]

@Juir

[Juir]

Thank you.

[Juir]

Why do I put J in box 7 when J is for Early Distribution from a Roth IRA.  We are over 60, so it is not an early withdrawal.  It is a withdrawal to correct an excess contribution because we had no earned income in 2021.  Can I just put P and nothing else.  P is excess contributions plus earnings in 2021?

Do I have to put J and P for some reason in box 7 of a substitute 1099-R?  When we get the real 1099-R from our investment company in Jan 2023, I don't know what letters or numbers will be on it.  (We discovered the excess contribution for 2021 in Feb of 2022 and the transaction to return excess contribution and earnings on excess contributions was done in Feb of 2022.)

Also, when creating this substitute 1099-R, why would I say yes that I have received a 1099-R for 2021 when I didn't receive one.  I will receive a 1099-R in 2023, but I don't know what date will be on it.  I don't know if it will say 2021 or 2022.  Excess contributions were made in 2021 and there were earnings in 2021 and we have to pay taxes on the earnings in 2021, but don't know how the 1022-R will be labeled.  Also, some transactions were made in 2022 from that Roth IRA, so those transactions will be labeled 2022.  But, concerned about the 2021 transactions now.  I want to do the paperwork and tax return correctly so we won't have to amend the return next year.

[ThomasM125]

You should enter code 8 for a 2021 1099-R, the code P applies to a 2022 1099-R. You shouldn't answer that a form 1099-R was issued in 2021.

@Juir

[Edited 3/3/2022 at 12:11 PM PST]

[Juir]

This is very confusing.

I have the IRS instructions for 1099-R.  For Box 7 codes, it says:

8 -- Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2022.

P -- Excess contributions plus earnings/excess deferrals taxable in 2021.

Aren't our earnings on excess contributions taxable for the year 2021 and therefore P??

And, what year should I put on the substitute 1099-R.  The investment company will send us a 1099-R in January of 2023 for this withdrawal transaction, but I think it will have 2022 for the year.

[ThomasM125]

The instructions you are referring to are for a 2022 form 1099-R. When you pull it up from the IRS website, they show the form for 2022. It is different from the one you are entering for 2021.

You made the excess contributions in 2021 so that is the year you need to add the substitute 1099-R for. In 2023, you will get a form 1099-R showing year 2022 on it. Hopefully, it will have code P in box 7, which says it was taxable in 2021. If so, then you just need to enter it and be done with everything!

[Juir]

OK for the code.

I talked to an accountant today and to the IRS.  Both said I shouldn't be making a fake or substitute 1099-R.  The problem is

1. I need to report the earnings on excess contributions to a Roth IRA made in 2021 on my 2021 return.
2. IRS said these earnings need to be reported on lines 4a and 4b.
3. The real 1099-R won't come until Jan of 2023.
4. The only way I could get Turbo Tax to put the earnings in the right place was to make a "fake" 1099-R and mark the IRA/SEP/Simple box and put code 8 in Box 7.

Questions:

1. When I e-file, will the 1099-R's be sent to the IRS?  
2. Will only 1099-R's with federal tax withholdling be sent to IRS?
3. Is there any other way to get earnings on excess contributions to Roth IRA to go into the correct place on Form 1040 (lines 4a and 4b)?
4. If not, do I make a regular 1099-R or a substitute 1099-R?

Turbo Tax needs to find a better way for filers to report this info without resorting to making up 1099-R's.

[fanfare]

Too bad you get five different answers from so-called experts to a simple question that happens all the time.

Too bad TurboTax Online and TurboTax CD/download have different behaviors in these situations.

[fanfare]

search the forum for answers from dmertz

on your question and you will get correct information.

Or ping him with the at sign.

[Juir]

I tried but couldn't find an answer to my problem from dmertz.

But you are right.  This should be easy problem to fix on Turbo Tax and report to IRS in the best legal way.